Analyst says dump GM, Ford in favor of Toyota

That's the gist of Prudential Equity Group analyst Mark Warnsman's advice to clients Wednesday as he initiated coverage of the automotive industry with a mostly bullish stance.

While he joined the crowded bear camp for General Motors Corp.
GM, -0.20%
and Ford Motor Co.
F, +2.21%
Warnsman told investors that now would be a good time to buy Toyota Motor Corp.
TM, +0.15%
and Honda Motor Co.
HMC, -0.57%

He's not alone.

About half of the Wall Street analysts covering GM and Ford rate both stocks a sell, according to Thomson Financial. Toyota, by comparison, is covered by four analysts, all of which carry a buy rating on the shares.

As for DaimlerChrysler
DCX
Warnsman said the German-American car giant might be better off not selling its U.S. division.

The industry, while suffering from chronic overcapacity, shifts in consumer preference and the risk of government intervention, is still primed for growth, Warnsman said.

"Automobile manufacturers, as a whole, should continue to benefit from a benign global economic environment, growth opportunities in developing markets and the continued strength of the US market -- the world's largest," he told clients in a note.

Follow the soon-to-be leader

At the top of the industry heap is Toyota, which is on track to unseat GM as the world's largest automaker. Warnsman initiated coverage of the Japanese juggernaut with an overweight rating and a 12-to18 month price target of $151 a share.

He cited a cultural strength, an increasing presence in developing markets as well as in the U.S., and its ability to maintain market leadership in Japan.

"We looked closely at the risks to Toyota's dominance and draw the conclusion that they are all manageable, particular given the strength of the company's balance sheet," he said.

Toyota shares closed up less than 1% at $127.74.

Separately, Warnsman started coverage of Honda with an overweight rating and a price target of $46 a share, saying the consumer trend towards fuel-efficient vehicles plays right into the company's strengths.

He pointed out that while Toyota, Honda's closest competitor, is trading at a deserved premium, the gap will likely close.

Honda's stock finished up 1.5% at $36.01.

Rough road for GM, Ford

The hurdles facing domestic manufacturers are well publicized, and Warnsman didn't hold out much hope for either GM or Ford.

He initiated coverage of GM with an underweight rating and a price target of $26 a share, citing the company's inability to fully address key structural issues and the lack of a "robust, global luxury brand" to help bolster sales.

"Our concern is that the restructuring process undertaken by the company is consistent with historical practice, but falls short in the present competitive environment," he said.

GM shares shed 1.4% to end at $31.03.

Warnsman was equally bearish on Ford, which he started at underweight with a price target of $6 a share. He said that while he's confident that the company can deliver on its plans to restore profitability by 2009, key structural issues will likely remain problematic.

"Specifically, we do not believe that Ford has the time or the capital necessary to realize CEO Alan Mulally's vision of 'One Ford' with globally integrated operations," he said.

Warnsman added that he believes the family is part of the problem, and that a real solution to the Ford woes would only come if the Fords distanced themselves from the company.

Ford's stock closed down 4 cents at $8.04.

Don't sell Chrysler

DaimlerChrysler Chairman Dieter Zetsche, speaking at the company's annual meeting on Wednesday, confirmed what shareholders already knew: Chrysler is for sale. See full story.

While German stock holders tend to cheer the idea of Mercedes without the drag of the U.S. division, Warnsman said he thinks it would be a mistake. In fact, the original merger strategy is still sound, he explained; it's the execution that needs some work.

"Chrysler provides DCX with the opportunity to address the competitive threat from Toyota/Lexus with economies of scale and low-cost engineering knowledge as well as the potential for establishing an assembly presence in low-cost countries without damaging the Mercedes brand," he wrote.

Beyond that, Warnsman said he's optimistic about the truck group as well as the potential for the Mercedes unit now that the recovery has taken hold.

Warnsman started DaimlerChrysler with a neutral rating and a price target of $58 a share. The stock fell 38 cents to finish at $82.57.

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